Friday, May 1, 2015

On April 29, 2015, the United
States District Court for the Central District of California, Hon. Phillip S.
Gutierrez, issued an important decision denying defendants' motion to compel
arbitration on an individual basis in Maria
Ford, et al. v. Gary Yasuda, et al. finding an arbitration agreement unenforceable
on grounds of waiver. The opinion provides a well-reasoned decision on conduct
inconsistent with arbitration rights and resulting prejudice suffered by the non-moving
party. In its decision, the court held that defendants had actively litigated
the case in federal court and warned against defendants attempting to compel arbitration for fear of future unfavorable rulings.

The Ford plaintiffs allege that while enrolled at Milan Institute of Cosmetology they were “employees” when they performed
services on their paying customers, sold products and services for the
for-profit business and engaged in janitorial work including stocking supplies
and laundering towels on behalf of defendants Milan Institute of
Cosmetology and Gary Yasuda. Because they were not paid wages or provided any
employee benefits to which they were due, the Ford plaintiffs brought suit in October 2013 on behalf of themselves and others
who enrolled at Milan.

The court denied defendants’ motion
which sought to compel individual arbitration and relief, in the alternative,
to extend the scheduling order to allow more time for discovery it had not
initiated pending the motion to compel, in its entirety. The court found that defendants
abandoned their rights to arbitration by unreasonably delaying filing a motion
to compel arbitration seventeen months into the litigation. The court also found
that defendants' delay was unjustified where it could not rest on claims on any
“precedential, procedural, or other barriers to arbitration.” The opinion
exposed defendants' “protracted silence regarding arbitration” as a conscious
effort to seek judicial judgment on a threshold legal question then shop for a
more receptive forum after an adverse ruling on the issue.

The court
found prejudice in the time defendants took after the filing of the complaint
and after it raised arbitration as an affirmative defense before moving to
compel. The court also found prejudice to the Ford plaintiffs due to a previous order by the court on defendants’
motion to dismiss which “resolved a crucial issue in [plaintiffs] favor.” Discussed
in a previous Bryan Schwartz Law blog post, the court determined
that “[b]ased on Martinez, the Court
concludes that the California Supreme Court would hold that [Defendants’]
students may be properly classified as its employees, if they are within the
definition of ‘employment’ established by the IWC.” The court’s analysis
highlights that where motions practice requires the litigation of claims on
the merits “touch[ing] on the basic issues in the case,” a motion to compel
following the motions practice will not be received favorably. As is the case here,
plaintiffs would be substantially prejudiced by a need to relitigate matters
decided by the district judge.

The decision not only permits the Ford plaintiffs to proceed in the
vindication of their statutory employment rights on behalf of themselves and
others similarly situated in federal court, but also enumerates conduct of parties moving to
compel arbitration that run afoul of a good faith exercise of arbitration
rights. Read the full opinion here.